Munich Personal RePEc Archive

Is government budget constraint binding?

Kim, Minseong (2019): Is government budget constraint binding?


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A common question against macroeconomics of public debts is: why should one think government budget constraint is binding when government, at least technically, can print out money to pay for debts. Out of compatible answers, we explore an answer that is not usually invoked. While in OLG models, government bonds can successfully exist as rational bubbles, concerns of time consistency leave trade-offs in exploiting breakdown of the economy-wise public debt transversality condition. Government budget constraint is one of most certain means to fight time consistency issues and ensure that market stability is achieved.

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